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On Tuesday, November 12, 2013, Institutional Investor and SumZero, the world’s largest online
membership community of buy-side investment professionals, hosted an idea competition at
Columbia University Business School’s Uris Hall Auditorium.
Nineteen emerging managers were selected from within the SumZero community on the basis of
strong performance and high-quality peer reviews. Each manager gave a three minute pitch on their
best idea to an audience of analysts and investors who rated their pitch for validity of the thesis,
strength of the argument, feasibility of the trade and originality.
We invite you to view these ideas and register to download each presenter’s bio and full pitch paper.
If you’re a professional investment officer or analyst, we invite you to register to vote for the winning
idea.
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Judy Krandel, CFA
Age: 48
Juniper Investment Co.
Title: Portfolio Manager
Location: New York
Education (Undergrad/Grad/Certifications): Wharton School of Business of the University of Pennsylvania –
undergrad; Booth School of Business of the University of Chicago – MBA; CFA
Previous Employers/Positions: Alpine Woods, Portfolio Manager; First New York Securities, Partner and Portfolio Manager; Kern Capital Management, Partner and Portfolio Manager; Delaware Management, Assistant
Portfolio Manager; Fred Alger Management, Senior Analyst
Bio: Ms. Krandel joined Juniper as a Portfolio Manager for the Juniper Public Fund in 2011. She has 20 years of experience as a small
cap portfolio manager and analyst. Ms. Krandel was a Portfolio Manager at Alpine Woods where she managed portions of two long/
short equity hedge funds. Prior to that she was a Portfolio Manager from 2001 to 2009 at First New York Securities, LLC where her
experience included founding and co-managing a domestic long short small cap hedge fund. Ms. Krandel has been engaged in public
equity research and investing since 1992, starting with Fred Alger Management, followed by positions at Delaware Management and
Kern Capital Management. Ms. Krandel received her B.S. from the Wharton School of Business of the University of Pennsylvania and
her M.B.A. from the Booth School of Business of the University of Chicago.
Favorite Investment Book: Microcap Mania – a book on microcap investing I am writing
Favorite Quote/Author: John Steinbeck – East of Eden is one
of the greatest books I have read. It taught me early on that a
strong, smart and focused woman can have great influence and
impact on men. Although, perhaps she took things a bit too far…
“Sometimes a man wants to be stupid if it lets him do a thing his
cleverness forbids.”
Most Attractive Area of the Market Right Now:
Small cap value stocks – those that are not quite hitting their
growth stride. The world is chasing growth and forgetting real
businesses that generate real cash, but don’t happen to be
achieving their growth potential at this moment. There are still
many trading at less than 5x ebitda.
Least Attractive Area of the Market Right Now:
Go go growth stocks (that every fund manager feels he/she must
own), focused on such hot areas as social and mobile technologies, cleantech, healthy eating and recent IPOs. i.e., FB, TSLA,
BNNY, PBPB
Best Past Investment Made: 2013, Talon, TALN (formerly Tag-it
Pacific, TAG): I never lost touch with the new realistic CEO and
never lost sight of the stock. I reacquired the stock in early 2013
and have made 8x my money this year.
Worst Past Investment Made: 2005, Talon, TALN (formerly Tag-it
Pacific, TAG): I bet on a bad balance sheet (the cause of most
of my bad investment decisions) while naively believing the story
spun by a dreamer of a CEO. I lost 70%.
Personal Investing Style: Opportunistic Value: Value comes in
all sizes (from micro to large cap) as well as in all asset classes
and geographies. My focus is on total return including capital
gains and dividends. I buy out of favor, overlooked and undervalued situations and sell over loved, over owned situations. I like
to say I buy when it hurts and sell when it hurts. Go against the
crowd.
Areas of Personal Expertise:North America small cap value,
generalist with a focus on consumer, healthcare, industrial, technology and services.
Fund Description:
Juniper Public Fund, L.P. invests in a concentrated portfolio of equity securities of U.S. publicly traded companies. The fund will
seek to achieve substantial capital appreciation by bringing a private equity investment approach to smaller capitalization public
companies. The Investment Adviser believes that properly selected and evaluated concentrated positions offer several opportunities
to achieve substantial investment gains. Gains will be achieved by market recognition of undervalued corporate assets; financial
repositioning through the capital structure or access to growth capital; transformation of a business through the execution of a business plan; or through change of control transactions. The investment advisor will rely on the 65+ years of investment experience of
the Portfolio Managers in control equity investments in both private and public companies to identify and achieve success with these
strategies.
Firm Strategy and Focus: Small-cap value, long biased. Juniper aspires to achieve substantial capital appreciation by investing in
U.S. small-cap companies. Many small companies operate sub-optimally and cannot justify resources to be public. The lack of serious institutional following results in businesses trading well below their franchise value and DCF valuations. They are denied primary
benefits of being a public company – the ability to utilize the capital markets to raise equity capital efficiently and the ability to use their
common stock as a currency for accretive acquisitions. Juniper believes that control shareholders can have a real impact on companies of this scale by implementing a long-term plan to maximize value. Juniper applies the experience its Principals gained through
their 65 years of public/ private equity investing to build a concentrated portfolio that will include control positions (> 5% of the issuer’s
equity) in small-cap companies. Juniper provides portfolio companies with a stable ownership structure and seeks to collaborate with
management to establish a foundation for future growth and a plan to maximize value for all shareholders.
Past Ideas Submitted on SumZero: Fila Korea: Finalist in the SumZero Value Investing Challenge.
AUM: $50 million
Fund Disclaimer: Please see section 14 of appendix.
CafePress
Ticker: PRSS
Action: Long
Asset Class: Equities
Expected Timeframe: 6 - 12 months
Situation: Value
Current Price: $6
Target Price: $10.5
Diluted Shares: 17.4MM
Cash: $22MM
Debt: 0
Non-Controlling Interest: n/a
Catalysts: Internal top line growth and margins improving from current restructuring
Currency: $
Elevator Pitch: The company is in the penalty box for past mistakes including a sloppy
IPO, missing projections and poorly integrating acquisitions. What remains is a
legitimate ecommerce business with a critical mass of revenues, leading technology,
proprietary library of content and undervalued and forgotten equity value.
Thesis:
CafePress (PRSS) is a leading ecommerce platform enabling worldwide customers to
create, buy and sell a wide variety of customized and personalized products. Products
include clothing, accessories, art, photography, posters, stickers, home accents, and
stationary. There are currently over 500 base goods available to design. This is truly
crowd-sourced or user generated content. The company serves its customers and
content owners through its portfolio of e-commerce websites, led by its flagship site
CafePress.com. Customers include millions of individuals, groups, businesses and
organizations who use PRSS’s innovative and proprietary print-on-demand services to
create customized products. There are currently 19MM registered members, 3MM
individual shops that offer PRSS’ services and over 3MM current customers. The
company works with content owners (individual designers, artists, and branded content
licensors) to leverage its platform to reach a broad consumer base and monetize their
content. The company’s technology allows for single unit and small quantity orders on a
when-ordered-basis. The company ships over 8MM items per year and growing.
The personalized segment is extremely fragmented, with most of it served through
offline businesses. Industry estimates range from $25B to $1Trillion depending on which
category of products and which geographies one includes. Today, PRSS is mostly a
domestic business with only 15% of the business overseas, mostly in Europe.
The business is highly seasonal with about 40% of business coming in the fourth
quarter. There is a large retail component and of course holiday giving is a big season.
The company tracks total number of customers, total number of orders, and average
order size (AOS). AOS has traditionally run $50 - $53, and has been relatively stable.
With the most recent acquisition of EZ Prints, the AOS has declined to $38 due to mix.
EZ Prints business has a much lower order value, including many orders below $10.
One of the company’s goals is to raise AOS through new higher priced items such as
home goods and logo sportswear.
The company has 3 types of revenue streams due to its diverse business model:
First, the company recognizes full revenues from online transactions through its portfolio
of e-commerce websites, where customers find or design and buy products.
Second, the company recognizes net revenues (revenues less royalty payments to
content owners) when an item is purchased using licensed content or from a previously
designed product from one of its millions of designers. The company licenses content,
particularly in the area of entertainment, for customers to use when designing products.
PRSS also works as the backend for other’s storefronts (i.e., ABC.com,
Urbanoutfitters.com) to allow those businesses to offer create and buy services using
their own proprietary content.
Most recently, PRSS signed a deal with Marvel to give its customers access to the
marvel characters. This is significant, as there is a move toward content owners looking
for additional ways to monetize their investment. The Marvel characters have great
appeal, and now consumers can use these to design all sorts of exciting products. If a
company like Marvel needed PRSS’ expertise to allow customization, imagine how many
smaller content owners could benefit from a similar relationship. Likewise, PRSS has s
deal with Sony Pictures to launch a store for the TV show Breaking Bad. These are just
a few of the new entertainment and licensed opportunities for PRSS.
Finally, the company also acts as a fulfillment partner to other e-commerce businesses.
Here PRSS does not take title to the inventory and only recognizes fees for services as
revenues.
Just a point on designers - individuals use the site and vast creative resources to design
interesting products that others might like (whether to wear, or for the home, etc.).
Designers are creating 100,000 new designs per week on average. Those products
remain on the site, and can be searched for and discovered by other customers. This
allows for “long tail marketing”. If a customer buys a designer’s product, that designer
gets 10% of the revenues. This has created an industry for a number of talented
designers. In fact, there is a small number of designers who work from home to design
products and earn 6 figure incomes. This has also created a huge library of proprietary
products for PRSS, as the company owns the designs. PRSS’ library is increasing by
over 130,000 new images a week. Today, the company has a catalog of over 400MM
unique products.
The company’s cost of sales includes raw materials (i.e., cotton, as t-shirts are close to
half of the business today) for its base products, shipping, labor, royalties and fixed
overhead related to manufacturing facilities. The company is currently consolidating
numerous facilities it has acquired through acquisitions to increase utilization and
improve manufacturing, labor and shipping efficiencies. Inventory consists of such things
as blank t-shirts, mugs, etc. These products never really go bad and are sourced both
locally and in Asia. Given the on-demand nature of the business, inventory levels can
stay relatively low and the business can scale nicely.
Sales and marketing expense consists mainly of customer acquisition and customer
support costs. One of the major keys to this business is efficient customer acquisition.
Customers are acquired through various programs including paid search marketing,
email campaigns, flash deal promotions, display advertising, and social media programs.
In the past, PRSS relied too heavily on Google search to organically drive the business
and has broadened out its marketing investments. Today about 20% of traffic comes
through Amazon sites, 15% through Google sites, 8% through Facebook, 7% through
Yahoo sites and 3% through others like Microsoft sites, Twitter and Pinterest. The
company continues to refine the right level of spending and has increased this expense
on an absolute and per customer level as the ROI proves positive.
Customer acquisition costs run about $10 recently. On an average order of $50, with a
gross margin around 40%, this leaves $10 of incremental profits after acquisition costs in
year one. This does not consider that the average orders per customer runs about 1.4
orders per year and growing, yielding $14 on average in profits on a $10 marketing
investment before overhead. PRSS is also focused on lifetime value of a customer and
is driving investments to increase order frequency and AOS. The company tends to
realize higher average order values from repeat customers compared to first time
customers.
PRSS also invests a significant sum in technology and development as the other major
key to this business is efficient back end customization technology and fulfillment. These
dollars support its website operations as well as customized systems and equipment
used to manufacture customer orders. PRSS has proprietary pre-press technology and
can produce high quality products across many categories. It buys off-the-shelf printers
and re-engineers the drivers allowing them to handle mass customization jobs. It has
developed custom order routing software to aggregate orders and route them to the
appropriate printing location. The company’s systems guide and track products through
assembly, packaging, sorting and shipment. The company has 3 issued and a number of
patents pending relating to ecommerce services, proprietary printing and decorating
services.
PRSS has grown both internally and through acquisitions. In the past 3 years, the
company has acquired a number of businesses to expand its categories (i.e.,
canvasondemand.com), customers (logo sportswear - to offer personalized apparel for
groups and organizations), and technology offerings (EZ Prints). The EZ Prints
acquisition is significant as it offers proprietary software that helps power the
customization services for third party retailers. EZ Prints had over 130 partners
(including Disney) using its end to end customization solution at the time of acquisition.
PRSS has used a combination of upfront payments and earn outs to complete these
deals. There was a time that the backend earn out liability was significant. The company
has worked through much of this at this point including writing off part due to
underperformance from the EZ Prints acquisition. EZ Prints had some legacy business
that has underperformed, but this doesn’t change the power of and importance of the
technology.
PRSS competes with traditional offline printing businesses, catalog retailers, and ecommerce players like Amazon, Vistaprint, Zazzle, Art.com, and other customized sites.
This is and will always be an extremely competitive market - and that is the number one
risk to the business. Yet, it also allows for creative and strong technology players like
PRSS to grow share and acquire niche tuck-in situations. Other risks include copyright
or trademark infringement from user-generated content. There is a potential liability for
user content due to things like racism and pornography. PRSS does maintain strict
content usage policies to try to avoid such situations.
Top management has been with the company for some time now. Key members
include:
Bob Marino is the CEO. He joined the company in 2005 and the board in 2011. He
started in operations and grew up from there. Prior to joining PRSS, he served as CEO
of Cuisine Innovations and a VP of Tyson Foods.
Monica Johnson has been the CFO since 2005. Prior to joining PRSS, she was the CFO
of ARC International, and VP of Finance at Webvan.
Fred Durham is the co-founder of PRSS and the Chief Product Officer. He is a serial
entrepreneur and has extensive experience in the e-commerce industry. He owns about
10% of the company. Another 16% of the company is owned by the original VC,
Sequoia Capital. I can’t imagine they are happy with the stock performance and must be
considering all ways to get fair value here.
Why is the stock $6? What went wrong?
1. Management was not prepared to be public.
2. The company went public on unrealistic projections and used the past to linearly
project the future. The company missed estimates and alienated the sell-side.
3. The business model was too reliant on search - in particular Google search. A few
years ago, Google changed its search algorithms, which affected traffic negatively for
many small sites. This change hurt traffic on many of PRSS’ small shop clients as they
found it hard to stay relevant in search results. Search traffic is also expensive traffic
given the revenue share that Google takes.
4. The company’s European business was hurt from the recession.
5. The company did not fully flesh out its business model. Who is the customer? How do
they reach the customer and at what cost? Who makes the best partners?
6. The company completed a number of acquisitions in a short time and did not
appropriately value them and integrate them.
7. In 2008, the company got a 10% lift from election-related content. Obama was new
and exciting. PRSS did not see nearly the same lift in 2012, which it expected.
8. Earnings and cash flow in 2013 are severely hurt due to one-time investments to
consolidate facilities and integrate acquisitions. The company has been running
duplicative facilities to insure no disruption during this transition. This is expected to be
completed by the end of 2013.
9. Let me repeat #1: Management was not prepared to be public.
What is going right?
1. Valuation - the stock is $6 and trades for a fraction of revenues, with a year-end
estimated net cash balance of at least $30MM and positive ebitda. It has been thrown
out for dead.
2. PRSS is a pioneer and leader in online customization - a huge and growing worldwide
market. The company has 19MM members and growing and a large proprietary content
library.
3. PRSS is building a powerful e-commerce platform focused on best-in-class scalable
technology.
4. The CEO is a visionary with a strong marketing and operating background.
5. The company is starting to develop appropriate financial disciplines and a focused
business model.
6. The company is consolidating redundant facilities to create a more streamlined and
profitable business with room to scale.
7. Key acquisitions like EZ Prints has broadened the business model and opened up
opportunities for additional b2b partnerships.
8. The company continues to be ebitda positive despite short-term operational issues
and incremental investments.
9. PRSS has licensing agreements with major entertainment players like Marvel. This
offers a huge new opportunity.
10. The company is launching a number of new sites with Fortune 500 companies that
will add new business in 2014 and beyond.
11. With $250MM in revenues, the company’s size makes it an attractive acquisition
candidate by a larger ecommerce player.
12. Positive ROI on new customer acquisition investments.
What is this worth?
PRSS today trades for .32X sales and 6X ebitda. Ebitda is depressed this year by one
time investment spending of $5MM to complete the plant consolidation. If you adjust for
that, the company is trading at an ev/ebitda of 5X - food for thought as one considers
comparable situations.
There are a number of companies that I believe PRSS should be compared to when
considering the appropriate valuation. Although no one is a perfect match, many have
similar business models, characteristics, customer profiles, etc. The most important
message I want to express, is the company has a value to consumers and business
alike. It has a b2b and b2c and b2b2c component all tied in to one business. This past
year of acquisitions, integration, broadened distribution, and frankly catching up on
direction and focus has hurt earnings and clouded the value of the business.
GSI Commerce: GSI was the first public company to focus on e-commerce fulfillment
and distribution for other companies. EBay bought the company a few years ago for a
significant multiple of revenues and even more so of ebitda. The founder of GSI
Commerce then went on to start a new related business called Fanatics.
Dreams, Inc.: Dreams was public until recently when it was bought by a private company
called Fanatics. The founder of Fanatics had founded GSI Commerce, which he sold to
EBay. Dreams was also in the ecommerce fulfillment and distribution business - but
focused entirely on sports apparel. Dreams had the license to many professional and
college sports content and was the backend marketing and fulfillment for many sportsrelated sites and businesses. This was acquired for over 1X revenues, 30X trailing
ebitda and 14X forward ebitda. The company had signed a few deals that gave them
visibility on big forward growth.
PNI Digital Media (PN on the Toronto exchange): This is an ecommerce company that
provides transaction processing and order routing services by connecting consumers
with ordered digital content with retailers. This company is mostly involved in digital
pictures and to a lesser degree, stationary. This company has had declining revenues
and ebitda for 4 straight years. This company is currently trading for 1.3X revenues and
33X ebitda.
PFS Web (PFSW): This company is a provider of end to end e-commerce solutions.
PFSW has no proprietary content or library of content. The company is primarily
domestic, although recently it received an investment from a Japanese company and
now has an Asian partner to help build the international business. The company also has
a declining products and distribution business, which is not worth much. The company is
currently trading at .4X revenues and 10X ebitda.
Speed Commerce (SPDC): This company recently changed its name from Navar
(NAVR). SPDC also is a provider of end to end ecommerce solutions with no proprietary
content. SPDC has a very small international business. Navar originally bought Speed
Commerce for about 1.1X sales and 9X ebitda. SPDC today consists of its e-commerce
business plus a product distribution business. The products business is by far the
majority of its sales so the comparisons are not quite apples to apples. At the beginning
of 2012, before Navar acquired Speed, it was trading at an ev/sales of about .1X. That is
how little the street valued the business. Today, the company is trading at an ev/sales of
.45X (with still the majority of its sales in the old products business) and 12X ebitda.
Vistaprint (VPRT): VPRT is an online supplier of graphic design and customized printed
products to small businesses and consumers. This is one of a very few public
companies that offers its customers the ability to truly customize the end product. The
company does have high gross margins (65%) as it pays no royalties and its cost of
goods is very low. Customer acquisition cost is more than twice what PRSS pays, so the
net contribution of a new customer is similar to that of PRSS. VPRT trades for 1.5X
sales and 10X ebitda.
Shutterfly (SFLY): SFLY produces and sells professionally-bound photo books, greeting
and stationery cards, personalized calendars, and other photo-based merchandise. This
company also offers customization features to its customers, although it is very narrow in
its photo niche. Gross margins are also high at 54%, yet customer acquisition cost is
also much higher than that of PRSS. The company trades for 2.2X sales and 11X ebitda.
Shutterstock (SSTK): SSTK is a global provider of licensed photographs, illustrations
and videos to businesses and marketing agencies. The company does license
proprietary content and allows its use in a customized fashion. Again, this is a high gross
margin business at almost 62%. The company trades for 10X sales and 48X ebitda.
Opportunities - What more can PRSS do?
PRSS has many ways to grow through expanding products, gaining new customers,
increasing average order size and repeat business, new partnerships with owners of
branded content, geographical expansion to Asia, Middle East and Latin America, and
acquisitions. The company can also approach businesses like PFS Web and Speed
Commerce to work together to offer complete customization and ecommerce fulfillment
solutions.
The company is just beginning to explore opportunities in the nonprofit world. PRSS has
launched dedicated sites for such organizations as Autism Speaks. These sites allow
people to make donations by buying custom t-shirts and other goods.
I approached the CEO of PRSS with an idea to enter the healthy eating category. As
mentioned earlier, Wall St. currently values this category as a fast growing, timely, high
multiple business. I am one who suffers from tremendous food allergies. I order many
customized food products online that require efficient and small production runs. I have
to be less concerned about price than I am about ingredients. I suggested PRSS look to
buy Youbars.com (among others). Youbars.com allows you to create bars to your liking.
With You Bar:
“You choose the ingredients and the bar size.
You view the nutrition facts of your custom energy bar while you are creating it.
Your box of custom nutrition bars is made fresh-to-order and shipped to your door with a
satisfaction guarantee.
Your customized nutrition facts and your chosen protein bar name are printed on each
individual protein bar package.”
The CEO of PRSS happens to know well the founder of You Bar. Bob Marino is even
mentioned in a book on customization written by the founder of You Bar. Who knows
where this relationship could lead or what it could mean for future growth areas.
One can see how this business could be much larger than it is today while maintaining
its leadership position. The company should complete its integration and restructuring
this year. If it can continue to add new customers profitably and grow incremental profits,
this won’t continue to trade at its current valuation. And it very well may not remain an
independent public company forever.
The company feels strongly that it can grow internally double digits. As the new social
and mobile efforts take hold, internal growth will improve. The company has reduced the
number of flash sales (i.e., Groupon-type business) which has hurt sales in the short
term but will help margins in the long run. The new partnerships like Marvel and other
top companies will add to growth as they are launched. Signing of these happened a
while ago, but the timing of launch has been unpredictable due to the initial work and
customer’s timing. Many new seeds have been planted which should start to show up
next year.
Gross margins have been hurt by over 300 basis points due to the interruption from the
integration and running of duplicative facilities, and the inclusion of the EZ Prints
business. The integration will be complete by year end and the company has just
anniversaried the acquisition, so the negative margin compares should be behind them.
Additionally, capital expenditures are elevated this year at $14MM to complete the
integration. As earnings recover and capex resorts to normalized levels, cash flows
should improve.
2014 Analysis
For argument’s sake, I assume the company only improves profitability on current
business by 200bp due to a higher gross margin. This should be easy to do as the
expense on the restructuring will be behind it.
2013 Revenues
2% Gr Mgn improvement
$250MM
$5MM
If the business grows only 10% next year:
2014 Incremental sales
Gross Profit at 41%
S&M @25% of sales
G&A @8% of sales
Operating Profit
$25MM
10.3MM
6.2MM
2.0MM
2.1MM
Total incremental oper. profit
After tax Net Income
Incremental 2014 EPS
$7.1MM
4.6MM
$.27
2013 estimated ebitda
2013 one time investments
2014 base case ebitda
$12MM
5MM
17MM
2014 incremental op. profit
2014 incremental depreciation
2014 incremental ebitda
2014 possible ebitda
2.1MM
1.5MM
3.6MM
20.6MM
At $6, PRSS is trading at 3.6X 2014 ebitda. Given, the company’s market position,
proprietary content, technology innovation, corporate partnerships and so much more,
this seems a little extreme. I do believe PRSS has “earned” a discounted valuation to the
comps listed earlier until it proves out consistent sales and earnings growth. But the
seeds are planted to begin to see that next year. A fair valuation for PRSS might be .6X
Sales and 7X ebitda which puts the stock next year at $10.5. And if the company should
be approached by a suitor, a valuation of 1X sales or 8 - 10X ebitda is possible.
Legal Disclosures:
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unsubstantiated rumors or misrepresentations and does not involve any act, practice, or course
of business which operates or would operate as a fraud or deceit upon any person in
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